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Federal Reserve boosts flow of dollars to European Central Bank

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Neil Irwin and Michael Birnbaum
Washington Post
Sept 16, 2011

Worried that a mounting debt crisis in Europe could trip up the global economy, the Federal Reserve opened its vault Thursday to the central banks of other countries in an effort to head off a crippling shortage of dollars.

The main recipient of the Fed’s money is the European Central Bank, which will in turn extend dollar loans to banks in the nations that use the euro currency. Those banks do significant business in dollars, for instance making loans to customers operating around the world, and have been finding it harder to raise dollars from anxious investors.

The initiative, which entails temporarily swapping dollars for foreign currencies, also involves the central banks of Britain, Switzerland and Japan, underlining the extent of international concern about Europe’s deteriorating financial system. By tapping the Fed for dollars, the other central banks are taking advantage of long-standing arrangements, first put in place four years ago at the outset of the global financial crisis to prevent bank lending from freezing up.

Global stock markets surged on the news of this coordinated response by some of the world’s leading central banks. The Standard & Poor’s 500-stock index in the United States rose 1.7 percent Thursday, and the German stock market closed up 3.2 percent. Asian markets rose in early Friday trading, with Japan’s Nikkei 225 index up 1.7 percent at midday. The value of the euro currency rose on greater optimism that the European debt crisis can be resolved.

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This article was posted: Friday, September 16, 2011 at 8:26 am

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